Threat of Prison in Tom Buck Churning Case Alarms Brokers
The potential imprisonment of Tom Buck, a former top Merrill Lynch producer who has agreed to plead guilty to churning and overcharging customers, has raised alarm bells among brokers and lawyers.
No one denies that stealing is a crime, but it is rare to see a retail broker face Justice Department prosecution and prison after sanctioning on civil charges by regulators, they said. Buck was permanently barred by the Financial Industry Regulatory Authority in 2015 and this week also agreed to pay $5.1 million to settle Securities and Exchange civil fraud charges.
“This could be the opening salvo in a change of focus for prosecutors,” said Andrew Stoltmann, a plaintiffs’ attorney in Chicago.
Buck, who worked at Merrill for 33 years and was honored as its top broker in Indiana, faces a maximum of 25 years in prison when he is sentenced in January, U.S. Attorney James Minker in the Southern District of Indiana, announced on Tuesday.
“It’s unusual that this would rise to a criminal case,” said Cary Lapidus, a San Francisco-based securities lawyer and former SEC enforcement division staff attorney. “If you look back over the years, you wouldn’t see many cases that go to prosecution.”
Federal prosecutors, to be sure, likely moved harshly against Buck because they had extremely solid evidence, which is often hard to find in defining the ethical borders of managing brokerage and advisory accounts. When government lawyers get the rare set of facts that allow them to grab headlines and make a deterrence case, they grab it.
“They don’t pretend they’re going to prosecute everyone who violates the law,” said J. Bradley Bennett, the former head of Finra’s enforcement division who is now a partner at Baker Botts. “You just want to catch enough speeders, and the right speeders.”
A spokesman at the U.S. Attorney’s office in Indianapolis did not return a call for comment.
Buck traded excessively in 50 nondiscretionary accounts, sometimes without getting customers’ required authorization, and lied to Merrill compliance officials about disclosing to customers whether it would be less costly for them to be in fee-based rather than commission accounts, the U.S. Attorney said in its charging document.
Around 80% of the revenue Buck generated between 2012 and early 2015 came from commission accounts, while the average broker in his complex booked 70% of revenue in the transactional accounts, according to the document.
Customers lost $2.5 million because of the excessive charges, it said. Merrill had a 2.75% maximum fee on advisory accounts, while the commissions paid by one of Buck’s customers reached 4.39% of assets in the account.
In its civil complaint, the SEC said that Buck intentionally failed to inform some customers that a fee-based option could be cheaper.
Robert Hammerle, Buck’s criminal lawyer, said that none of the broker’s customers lost money on their investments, a fact he hopes to marshall in arguing for probation rather than a prison sentence.
“It’s all an improper billing practice,” Hammerle said. “Frequently, that’s resolved on a civil level. It’s disappointing that it wasn’t.”
The Buck case is likely to fortify firms that have been encouraging brokers to move clients from what the U.S. Attorney’s charging document calls a “traditional cost structure” to fee-based accounts, which generate a steady flow of revenue regardless of whether customers decide to trade. If nothing else, it is a stern lesson to advisors to be open about pricing alternatives and to resist temptation to line their pockets at the expense of customers.
“It’s a wake-up call for others engaging in this kind of activity to stop it,” said Lapidus.
—Jed Horowitz contributed to this story.